Wall Street is bullish on this chip giant, with Morgan Stanley giving it 55% upside

Published Tue, Jan 3 20237:49 PM EST

The once-hot chip sector was hit hard in 2022, with the PHLX Semiconductor Sector Index falling around 37% over the year. But Wall Street looks to be turning more optimistic on the segment. Several pros have recently urged investors to take a longer-term view on semicondictor stocks , given the importance of chips in several key secular trends. And one name keeps coming up as a top pick: Taiwan Semiconductor Manufacturing Company (TSMC). Steven Glass, managing director of Pella Funds Management, said in an email to CNBC Tuesday that TSMC has a "superb track record" of increasing its return on equity, a gauge of a firm's profitability derived by dividing net income by shareholders' equity. "[It has] very good value at current prices – depending on where its capex settles, the company is on a 5%-7% [free cash flow] yield," Glass said. Additionally, Glass expects TSMC to deliver double-digital topline growth over the next five years. "These metrics exceed our growth-valuation model, and TSMC's share price would have to increase by more than 50% for the company to no longer satisfy our requirements," he said. He added that Pella's investment in TSMC is paired with Dutch semiconductor firm ASML . "Owning both means we own the best two companies in the space with unquestionable dominance. Without them there is no iPhone, no Tesla, no AWS, and no future for technology." TSMC has been in focus recently, with Warren Buffett's Berkshire Hathaway building a sizable new stake in the company in the third quarter. The semiconductor giant also opened a second chip plant in Arizona , raising its investment in the state from $12 billion to $40 billion — one of the largest foreign investments in U.S. history. TSMC shares plummeted around 26% in 2022. But analysts overall remain positive, with 90% of those covering the stock giving it a buy rating, according to FactSet, and average price target upside of 37%. Morgan Stanley also named TSMC as a top pick in a December note, giving it a price target of $700, or upside of 55%. It says TSMC has "sustainable pricing power," and its long-term earnings growth "looks promising." BofA also said in December that it expects TSMC's presence to grow. It explained that the semiconductor industry must continue to invest at a high level in order to achieve future growth, however "investment efficiency" has deteriorated. "One possible scenario may be that it becomes more difficult to justify investment in the future, increasing demand from foundries such as TSMC," the bank said. — CNBC's Michael Bloom contributed to this report.